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Exclusive: Banks Brace For Osborne Tax Hit

Britain's banks are braced for a further hike in the annual levy they pay to the Treasury as George Osborne tries to head off suggestions that he is reducing the tax burden on the industry.

Senior (Xetra: 852271 - news) executives say they expect the Chancellor to announce an increase in the rate at which the bank levy is applied in the Autumn Statement on December 5.

If Mr Osborne does announce plans to maintain the £2.5bn yield from the country's biggest banks, it would represent the third increase since it was introduced two years ago.

A senior Treasury source said it would be "logical" to expect that the Government would seek to "at least maintain" the £2.5bn raised each year by the tax on banks' balance sheets.

In his Budget last March, Mr Osborne said that the levy would "be increased to 0.105pc from January 2013 so that banks will not benefit from additional corporation tax cuts and the levy will raise £2.5bn a year".

Some analysts believe the rate may have to rise even more sharply in 2013, and that it is certain to a year later as major banks such as Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) continue to shrink their balance sheets to comply with new capital rules.

Were Mr Osborne to decide to leave the levy rate unchanged, it would reduce the tax-take by hundreds of millions of pounds in 2014, leaving the Coalition open to accusations that it was going soft on the banking sector.

Some Whitehall figures believe the Chancellor might opt to pursue a new tax on bonuses in addition to the existing levy in a bid to appear tough on banks such as Barclays (LSE: BARC.L - news) .

He could also increase the overall yield although that would also face opposition from dividend-starved investors.

Bankers have criticised the industry levy on the basis that it penalises those banks which are less dependent on wholesale funding, such as HSBC (LSE: HSBA.L - news) and Standard Chartered (Other OTC: SCBFF.PK - news) , and which did not need rescuing by taxpayers in 2008.

Mr Osborne announced the first increase in the rate of the levy in February 2011, with the take soaring from £1.7bn to £2.5bn. Since then, he has repeatedly pledged to extract the maximum sustainable yield from the industry.

A new hike in the bank levy would risk inflaming tensions with the industry at a time when ministers are seeking a consensual approach to the launch of a new British Business Bank. An announcement about its launch is expected before the end of the month.

Bankers argue that the surge in compensation bills relating to payment protection insurance and other mis-selling is already stifling their capacity to lend and that the levy contributes to that squeeze on lending.

Mr Osborne's spokesman said the Treasury would not comment on tax-related measures ahead of the autumn statement.